Investment in the People s Republic of China

Transcription

1 Investment in the People s Republic of China Atlanta Beijing Brussels Chicago Cleveland Columbus Dallas Frankfurt Hong Kong Houston Irvine London Los Angeles Madrid Menlo Park Milan Moscow Munich New Delhi New York Paris Pittsburgh San Diego San Francisco Shanghai Singapore Sydney Taipei Tokyo Washington We summarize for your reference various issues regarding foreign direct investment in China. Please note that this memorandum is general in nature and is not meant to set forth actual or proposed structural alternatives in respect of any proposed China projects.

2 VARIOUS FOREIGN DIRECT INVESTMENT VEHICLES AND OTHER FORMS OF BUSINESS OPERATIONS 1. OVERVIEW Foreign direct investment in China typically takes the form of foreign investment enterprises ( FIEs ) structured as Sino-foreign Equity Joint Ventures ( EJVs ), Sino-foreign Cooperative Joint Ventures ( CJVs ) or Wholly Foreign Owned Enterprises ( WFOEs ). Resident foreign representative offices ( Rep Offices ) can also, to some extent, function as a vehicle for foreign investment. Other forms of direct investment, although briefly addressed below, are, as a practical matter, rarely used by foreign investors as a result of high legal entry restrictions and/or the lack of detailed rules and regulations. Foreign investors sometimes consider various contractual arrangements that do not necessarily require the setting up of an establishment in China as an alternative, or in addition to, the establishment of a direct investment vehicle. 2. APPROVAL AUTHORITIES Foreign direct investment in China is regulated by the Ministry of Commerce ( MOC ), which is the governmental department charged with administering and ensuring that foreign investment is in line with the State policy. MOC is generally empowered to approve all applications to establish FIEs except projects with a total investment in excess of US$100 million, in which case approval of the State Council is required. In practice, however, approval authority is often delegated to MOC s subordinate local bureaus of foreign trade and economic cooperation ( BOFTECs ). In order to promote regional economic growth, BOFTECs tend to be more flexible in the approval process than MOC. MOC, as a national commission, must consider an FIE s impact on both the local community and on China s broader national economic plans, whereas BOFTECs tend to concern themselves only with the impact an FIE may have within their local community. The documents required to establish an EJV, a CJV or a WFOE generally include a feasibility study report, a joint venture contract (not required for WFOEs) and articles of association. The approval process generally takes up to 3 months for an EJV, 45 days for a CJV and 30 days for a WFOE. It should be noted, however, that the time required to establish an FIE is not statutorily fixed and is subject to a number of variables (e.g., the time required to complete all requisite government consultations, negotiations, and approval by local or national Chinese government authorities and business registration). Indeed, in our experience, the process may range from 1 to 5 months or may sometimes take even longer if central authorities are involved. 3. PRIMARY INVESTMENT VEHICLES Various forms of investment vehicle are discussed below: 3.1 Representative Offices Rep Offices of foreign companies which are registered in China are not independent legal persons under the laws of the PRC, and accordingly, any liabilities or obligations incurred by a Rep Office are incurred by the foreign company which established the Rep Office. The foreign company therefore bears legal responsibility for all activities and actions of its Rep Office in the PRC. Rep Offices are legally permitted to engage in liaison and promotional activities as well as research and technical exchanges on behalf of their foreign headquarters, but they are legally prohibited from engaging in direct business activities. Certain limited rights are granted to Rep Offices pursuant to various regulations, including the right to lease office space and residential premises; obtain multiple-entry visas for registered representatives and other expatriate personnel; import office equipment and personal effects; open bank accounts; and hold themselves out as having a presence in China by displaying signs and distributing business cards which identify the PRC registered Rep Office. A major advantage of a Rep Office is that no approval process is required, only registration with the local branch of the State Administration of Industry and Commerce is required. The time required to establish a Rep Office is, in general, 1 to 2 months. One disadvantage of a Rep Office is that staff costs are higher than other investment vehicles because local staff must be compensated for the deductions made from the employee s salary by the employment service agent. Another disadvantage is that although a Rep Office is generally prohibited from engaging in direct business (i.e., 2

3 income generating) activities, a Rep Office is usually subject to income tax on deemed profit at a rate of approximately 10% of the Rep Office s income. This may be the Rep Office s actual reported income or deemed income calculated by the relevant tax authority based on the Rep Office s expenditure. 3.2 Wholly Foreign-Owned Enterprises A WFOE is an enterprise established within the territory of the PRC whose entire capital is invested by foreign investors. A WFOE is a Chinese legal entity and is usually established as a limited liability company, with the liability of the foreign investors limited to the amount of registered capital subscribed. WFOEs now account for the majority of foreign direct investment in China in terms of both number and invested capital. In the past, in order to obtain approval to establish a WFOE, a proposed WFOE was required to either export 50% or more of its products or introduce advanced technology into the PRC. With the introduction of the recent amendments to the WFOE legislation, WFOEs are no longer subject to these requirements. In addition, foreign investors are no longer required to make a commitment in the feasibility study report, application form or articles of association that the WFOE s products will target mainly overseas markets. However, there are still restrictions on the use of WFOEs in certain specific sectors, such as domestic retailing, foreign trade, etc. The Chinese government has given WFOEs relatively greater autonomy in operations and management. Other than the requirement that a WFOE has to appoint a legal representative to act on its behalf in commercial dealings, it is free to adopt a management structure that suits its needs. One marked advantage of the WFOE form is that, without a Chinese partner, the often protracted and sometimes difficult negotiation of a joint venture contract is avoided. Thus, the establishment of a WFOE may be less expensive and faster than the establishment of an EJV or CJV. In addition, because a WFOE is an entity wholly-owned by foreign investors, management decisions may be made, and day-to-day operations conducted, unilaterally without a Chinese partner s input. This obviously may serve to simplify and streamline management and operational issues. On the flip side, the difficulties of going it alone in China without a local Chinese partner must also be considered. In our experience, establishment of a WFOE can sometimes be daunting for parties without experience in China. A lack of relationships may also affect the approval and establishment of the WFOE, as well as problems relating to the access to land, market sectors, raw materials and distribution networks. 3.3 Equity Joint Ventures An EJV is a limited liability Chinese legal entity created by one or more Chinese parties and one or more foreign investors. Investors in an EJV share profits and losses strictly in proportion to their respective contributions to the registered capital of the EJV. EJVs resemble western style corporations in many respects but differ in certain fundamental areas. The main differences include the following: (1) investors hold no stock, but instead hold equity interests; (2) voting authority is vested in the board of directors rather than shareholders; (3) EJVs generally have limited duration, typically 30 years, but possibly longer depending on the nature of the EJV project (recent amendments to the EJV legislation has loosened restriction on the duration of EJVs); and (4) any transfer of a party s equity interest requires prior government approval as well as the approval of the other parties. The board of directors is the highest organ of authority in an EJV. The board is made up of directors who are appointed by the investors. In general, these appointments must reflect the ratios of the capital contributions made by the parties. The board must consist of at least 3 directors and the quorum of a board meeting must be two-thirds or more of the total number of directors. Directors of an EJV may be appointed for a term of office of up to 4 years and may be reappointed for consecutive terms of office. The chairman and vice-chairman are appointed or elected in accordance with the articles of association. If the Chinese party appoints the chairman, the foreign party must appoint the vicechairman and vice versa. 3

4 One of the main advantages of EJVs is that EJV laws and regulations are considered to be relatively more complete and predictable than, for example, those relating to CJVs. Disadvantages of EJVs, however, include the following: (1) a foreign investor s potential loss of control over certain business decisions as certain board resolutions are subject to unanimity requirements; and (2) a potential loss of protection of imported technology and other intellectual property rights. 3.4 Cooperative Joint Ventures A CJV may be structured as a limited liability company with a legal personality or as a contractual joint venture between distinct foreign and Chinese co-venturers (similar to a common law partnership except that the CJV does not itself become a separate legal person). U.S.-based companies investing in China may seek to use the contractual form of a CJV for the purpose of obtaining tax benefits available to partnerships in the U.S., although the relevant U.S. and PRC tax treatment should be specifically confirmed in each case. The CJV is the only investment vehicle that allows a foreign investor preferential options to recover its investment before the expiration of the CJV term. This is, however, allowed only if the CJV s assets will be transferred without compensation to the Chinese partner (similar to a BOT arrangement) after expiration of the joint venture s term and is also subject to rather onerous requirements. The requirements for the corporate governance of a limited liability CJV are very similar to those of an EJV, except that the maximum term of office for the directors of a CJV is 3 years. A major advantage of CJVs is flexibility. Unlike EJVs in which sharing of profits and losses must correlate to the ratio of the parties contribution to the registered capital of the joint venture, the parties to a CJV may agree on disproportional sharing of profits and losses. Thus, with creative structuring, it is possible to arrange for foreign investors in a CJV to have a higher proportion of profits than their Chinese partners, even though the foreign investors may not have a controlling stake. This is especially useful in strategic industry sectors in which foreign participation is limited to 50% or less of the registered capital. In addition, some CJVs may meet the standards for partnership set forth in U.S. Treasury Regulations and may permit pass-through of losses in the early stage of the project, an added tax advantage to the CJV form. The disadvantages to a CJV are similar to those of EJV as discussed above. 4. SECONDARY INVESTMENT VEHICLES 4.1 Limited Liability Companies Limited Liability Companies ( LLCs ) are governed by a board of directors which is subordinate to the shareholders. The liability of shareholders in an LLC is limited to the extent of their subscription for registered capital. The registered capital of an LLC must be contributed in a lump sum and dividends must be paid in proportion to the parties respective registered capital contributions. Although an LLC does not issue shares, it offers a number of advantages. Some basic advantages of an LLC include the following: (1) LLCs have perpetual existence; (2) only two-thirds votes are required for major issues (such as the transfer of the shares) as opposed to the unanimity requirement of the EJV and CJV structures; and (3) the shareholders rather than the board of directors are the highest decisionmaking body. Although the PRC Company Law does not specifically prohibit the establishment of foreign-invested LLCs (which is not also an EJV, a CJV or a WFOE), the lack of implementing regulations usually makes the establishment of such foreigninvested LLCs extremely difficult, if not impossible. 4.2 Joint Stock Companies A Joint Stock Company ( JSC ) is a Chinese limited liability company with issued share capital. Equity ownership of a JSC is established strictly on the basis of share ownership. The highest body of authority in a JSC is the shareholders in general meeting. While management decisions are vested with the board of directors. Major decisions such as amendments to the articles of association, increases or reductions of capital, merger, division or dissolution of the company or a change in the company s format must be approved by the shareholders. The directors are elected and may be removed by the shareholders (although not without cause). A JSC is generally required to establish a supervisory board. After 4

5 obtaining the requisite approvals, a JSC may be permitted to list its securities on a Chinese or a foreign stock exchange. The advantage of a JSC is that it closely resembles a foreign company, and is therefore a type of entity to which foreign investors can relate. A JSC also offers the ability to directly raise funds on the open market and to obtain financing through offerings of convertible bonds and other debt instruments, which are methods not available to other types of Chinese entities. However, foreign participation in entities of this type has not been widespread due to the more complex procedures for the establishment of JSCs and restriction on transfer of the founders or promoters shares. 4.3 Foreign Investment Holding Companies Foreign Investment Holding Companies ( FIHCs ) are legally established under a 1995 rule issued by Ministry of Foreign Trade and Economic Cooperation (i.e. the former name of MOC), which has recently been overhauled by MOC this year. The registered capital of a FIHC, however, should not be less than US$30 million. Unlike other companies whose external investment cannot exceed 50% of their net assets, FIHCs are not subject to such limitation. FIHCs are permitted to engage in pool purchasing of raw materials and provide consulting services for FIEs, as well as to sell products. An FIHC should first obtain the approval of the People s Bank of China before it can provide financial support to the FIEs established by itself. 4.4 Branch Offices Under the PRC Company Law, a foreign company may establish Branch Offices ( BO ) in China and such branches, unlike foreign Rep Offices which are prohibited from engaging in direct business activities, may engage in production and other business activities. Pursuant to the PRC Company Law, branches of foreign companies do not have the status of Chinese legal persons and their civil liabilities arising out of operational activities in China are to be borne by the relevant foreign companies. Pursuant to the PRC Company Law, a foreign company must allocate operating funds to its branches established in China, which amount should be determined by State Council regulations. As far as we understand, the State Council has yet to promulgate such regulations. Pursuant to the PRC Company Law, a foreign company seeking to establish a branch in China should apply with the competent authority (i.e., the MOC or BOFTEC authorities) by submitting the company s articles of association, certificate of incorporation and other required documents. After receiving approval, the foreign company must register with the State Administration of Industry and Commerce or its relevant local counterpart to obtain a business license. Notwithstanding the above provisions of the PRC Company Law, the lack of implementing regulations (except for certain specified industries such as banking) usually makes the establishment of branches by foreign companies extremely difficult, if not impossible. 4.5 Limited Partnerships Although in theory it is possible to establish a partnership in China, current practice allows only partnerships to be established under certain regional administrative regulations. As far as we understand, Limited Partnerships ( LPs ) are only permitted for foreign investors in the field of venture capital. The partners of an LP are referred to as the general partner and limited partners. The general partner has unlimited liability and manages the LP while the limited partners have limited liability and have the right to receive dividends. 5. OTHER FORMS OF DOING BUSINESS IN CHINA Foreign investors may choose to participate in China s economy without necessarily directly investing in China. Different contractual forms of such business activities are discussed below. 5.1 Processing and Assembling Under Chinese law, processing trade refers to operational activities in which a domestic enterprise uses raw and supplementary materials, spare parts, components and packaging materials which are totally or partially imported as bonded goods for processing and, after processing or assembling, exports the finished products to overseas markets. There are two categories of processing trade under the PRC law: (1) processing of supplied materials in which a foreign company supplies raw materials to a domestic manufacturing enterprise without payment and the domestic enterprise is compensated for its value-added activities 5

6 upon completion of the final products, and (2) processing of imported materials in which a domestic manufacturing enterprise purchases and imports raw materials itself, and sells the final products for full compensation. In the case of approved processing trade transactions, the import duty and valued-added tax which would normally be imposed upon the imported raw materials and parts, and the export duty which would normally be imposed upon the exported finished products, all can be exempted. 5.2 Compensation Trade Compensation Trade ( CT ) is a form of doing business which integrates technology trade, commodity trade and credit. This means that foreign investors can provide directly, or on the basis of credit, machinery and equipment for Chinese enterprises. The Chinese enterprises compensate the foreign investors in installments for the cost of the equipment and technology provided with the products manufactured using the equipment and technology provided. Major forms of compensation trade include direct compensation, indirect compensation, comprehensive compensation and labor compensation, with direct compensation being the most basic form. In the direct compensation form, the Chinese enterprises will compensate the foreign investors for the cost of the equipment and technology provided by foreign investors and the interest arising from it with products directly manufactured with the equipment and technology provided. 5.3 Leasing Leasing is a form of economic cooperation in which the lessor, through a contract for lease, leases machinery, equipment and other supplies to the lessee for a relatively long period of time. While the lease is in force, the lessor enjoys ownership of the leasehold property while the lessee enjoys the right to use the leasehold property and is under an obligation to pay a fixed rent. Upon the expiry of the lease, the leasehold may be disposed of in a manner agreed upon by both parties. Leasing can be particularly problematic in China, particularly in respect of foreign exchange and restrictions on the provision of financial services, so careful consideration and planning is generally required before any decision can be made to enter into leasing arrangements. FIE GENERAL INVESTMENT RESTRICTIONS Pursuant to the Regulations on Foreign Investment Guidelines promulgated by the State Council on 11 February 2002 (the Investment Regulations ) and the Foreign Investment Industrial Guidance Catalogue jointly promulgated by the Ministry of Foreign Trade and Economic Cooperation, the State Economic and Trade Commission and the State Planning Commission on 11 March 2002 ( Investment Catalogue ) (both the Investment Regulations and Investment Catalogue came into effect on 1 April 2002), there are four categories of foreign investment projects: (1) permitted; (2) encouraged; (3) restricted and (4) prohibited. Foreign investment projects under the latter three categories are listed in the Investment Catalogue according to industry sectors. 1. INVESTMENT CATALOGUE The first step that any foreign investor intending to invest in China should take is to check the Investment Catalogue to see if its intended foreign investment in the target sector is permitted under PRC laws and, if so, to refer to the Investment Provisions on the procedure for obtaining the relevant investment approvals. 1.1 Encouraged Category Generally, the projects which are encouraged are those that utilise high and advanced technology and those that promote environmental protection and energy conservation. In addition to the businesses that are specifically listed under the encouraged category of the Investment Catalogue, the Investment Provisions also deem certain types of investment as encouraged category projects and allow foreign investors participating in these investments to enjoy the same preferential treatment and incentives granted to the encouraged category projects. Such investments include: (1) those listed in the Guiding Foreign Investment in the Dominant Industries of the Central and Western Regions Catalogue ; (2) those in the permitted category of which 100% of the products are all intended for export; and 6

7 (3) those in the restricted category of which at least 70% of the products are for export, subject to approval being given by the government at the municipal, autonomous region or provincial level or the relevant department of the State Council. Investments under the encouraged category will also be exempted from custom duties and value-added taxes on imported equipment. The approval procedure for such encouraged category projects has also been relaxed. If the project does not involve any product subject to quota or require balancing by the State, the municipal, autonomous region or provincial level authorities can approve it even if its total investment amount exceeds US$30m. 1.2 Restricted Category Projects that are classified under the restricted category consist mainly of businesses which China has committed under the WTO to gradually allow greater foreign participation, and those that utilise technology that China already possesses. Approvals for the combined restricted category are to be sought from the authorities at the municipal, autonomous region or provincial level. 1.3 Prohibited Category Foreign investors are not allowed to invest in certain areas such as the broadcasting, film and television industry. 1.4 Permitted Category There is no separate listing for projects under the permitted category. Any project that is not specifically listed under any of the above three categories is considered a permitted category project. Notwithstanding the foregoing, the actual classification of any type of proposed business activity is subject to the discretion of the relevant approval authorities. Furthermore, in certain strategic industries, policy guidelines may limit foreign participation in FIEs to 50% or less of the registered capital, may specifically forbid WFOEs or may require investment in the form of either an EJV or a CJV. 2. COMMERCIAL ENTERPRISES In addition to the above, pursuant to the Measures for the Administration on Foreign Investment in Commercial Fields promulgated by the MOC on 16 April 2004 (the Commercial Measures ), foreign investors must set up FIEs in China to conduct the following businesses but may do so in the form of WFOEs: (1) commission agency: agents, brokers, auctioneers or other wholesalers for sale of goods, who sell goods of other people and provide relevant attaching services through collecting fees on the basis of contract; (2) wholesale: selling goods to retailers, customers of industry, commerce and organizations, or to other wholesalers or providing relevant attaching services; (3) retail: selling goods for consumption and use of individuals or groups or providing relevant attaching services in the fixed places or through television, telephone, mail order, internet, and automats; or (4) franchising: vesting other people with using its trademark, trade firm, or mode of management through signing contract for gaining remunerations or franchising fees. The implementation rules for the Commercial measures have not been announced yet, so it is too early to predict the approval process. RIGHT OF FOREIGN INVESTORS TO REPATRIATE DIVIDENDS Although strict government controls and procedures are still in place for the management of foreign exchange, it is legally permissible for foreign investors to remit their profits and even initial investment (subject to very stringent requirements) abroad under current PRC laws and regulations. Article 11 of the PRC EJV Law provides that a foreign joint venturer may remit out of the country (1) the net profit received after fulfilling its obligations under the laws and contracts and agreements; (2) funds distributed following the expiration or suspension of the EJV and (3) other funds in accordance with relevant foreign exchange regulations and in the currency specified in the EJV contract. 7

8 Article 22 of the PRC CJV Law provides that a foreign joint venturer may remit out of the country (1) the profit received after fulfilling its obligations under the laws and the CJV contract; (2) other legitimate income and (3) funds distributed following the termination of the CJV in accordance with the laws. Article 19 of the WFOE Law also specifically provides that a foreign investor may remit out of the country the distributed profits and other legitimate income and funds distributed following the expiration or liquidation of the WFOE in accordance with relevant foreign exchange regulations. Article 21 of the Administration of the Settlement, Sale and Payment of Foreign Exchange Provisions (the Settlement, Sale and Payment Provisions ) further provides that the after-tax profits or bonuses of foreign investors can be remitted out of the country based on the relevant board resolutions, and such remittances shall be paid from the FIE s foreign exchange account or by purchasing foreign exchange from a designated foreign exchange bank. Notice on Issues related to Designated Foreign Exchange Banks Handling of Remittance of Profits, Dividends, and Bonuses Abroad (the Remittance Notice ) provides the details and the documentation required for foreign investors to convert RMB profits into foreign exchange for remittance abroad. Article 1 of the Remittance Notice states that the following documents must be presented to a designated foreign exchange bank in order to convert RMB profits into foreign exchange and remit such funds to foreign investors: (1) the tax-payment certificate and the tax return (FIEs that enjoy tax exemption and deduction must provide relevant documents issued by the local tax bureau); (2) the auditor s report on profits, dividends, or bonuses for the current year, issued by an accounting firm; (3) the resolution of the board of directors concerning the distribution of profits, dividends, or bonuses for the current year; (4) the foreign exchange registration certificate; (5) the capital verification report issued by an accounting firm; and (6) other documents as required by the State Administration of Foreign Exchange ( SAFE ). As a prerequisite to the abovementioned foreign exchange profit repatriation, Article 5 of the Remittance Notice also provides that all of the registered capital of the FIE must have been completely paid in, as well as all relevant taxes. In very few circumstances, a foreign investor that has not yet paid in all of its subscribed capital contribution may, subject to approval by the original examination and approval authority, apply to the SAFE for repatriation of distributed profits in proportion to the registered capital that has been paid in. In addition, pursuant to the Remittance Notice, local branches of SAFE may still audit any remittance that exceeds US$100,000 or any remittance that they deem questionable after the approval by a designated foreign exchange bank. Nevertheless, based upon our experience in recent years and as confirmed by officials of SAFE, the documentation review process for repatriation of profits is now generally more of an administrative and procedural check than a discretionary review, and generally does not involve any further limitations or restrictions than those discussed above. RESIDUAL ASSETS ON LIQUIDATION There are generally two types of liquidation for FIEs: ordinary liquidation, which is more common; and special liquidation, which occurs when, for example, the FIE is unable to manage the liquidation process by itself. 1. ORDINARY LIQUIDATION An ordinary liquidation is commenced as of the date when (1) the FIE s term of operation expires; (2) the examination and approval authority approves the dissolution of the FIE; or (3) the joint venture contract is terminated pursuant to court judgment or arbitral results (only applicable to joint ventures). In theory, the entire liquidation process is no more than 180 days, although the liquidation committee may apply to the examination and approval authority for a 90-day extension due to exceptional circumstances. During liquidation, the FIE may not engage in new business activities. In addition, the following acts by the FIE will be invalid if effected within 180 days prior to the liquidation 8

9 commencement date: (1) assignment of FIE property without consideration; (2) sale of FIE property at abnormally low prices; (3) provision of property as security for debts that were originally not secured; (4) making payments for debts not yet due; (5) relinquishment of claims of the FIE. The liquidation committee should be appointed by the Board of Directors within 15 days of the liquidation commencement date and should have at least three persons. The liquidation committee exercises its powers subject to the oversight of the Board of Directors. Once the liquidation committee is formed, the FIE must furnish the committee with the FIE s accounting records, list of creditors and other information relevant to the liquidation. The liquidation committee may stipulate the time in which such documents will be submitted. The committee will prepare a liquidation plan, which should be confirmed by the FIE s Board of Directors and filed with the examination and approval authority. In terms of distribution of property, the following should be paid on a priority basis: (1) expenses required for the management, disposition and distribution of the FIE s property; (2) expenses for announcements, court costs and arbitration fees; and (3) other expenses payable during the course of the liquidation. Next in line are: (1) wages of and labor insurance premiums for the staff and workers; (2) taxes; and (3) other debts. Significant to an FIE s tax liabilities is Article 79 of the PRC Income Tax Implementing Regulations which provides that: In the case of a FIE which has already benefited from a period of exemption from or reduction of enterprise income tax... if its actual period of operations falls short of the stipulated period, the enterprise shall be required to repay the amount of enterprise income tax saved through such exemptions and reductions, except if it has sustained significant losses due to a natural disaster or accident. Collateral is used to satisfy claims of the secured creditors. If the proceeds from the disposition of the collateral are less than the value of the secured claims, then the resulting deficiency will form part of the unsecured claims. 2. SPECIAL LIQUIDATION Special liquidation occurs when the FIE cannot carry out liquidation on its own or is prohibited from carrying out liquidation on its own (e.g., when an FIE is ordered to shut down). Special liquidation commences on the date when such liquidation is approved by the examination and approval authority or when the FIE is ordered to close. In a special liquidation, members of the liquidation committee are appointed by the examination and approval authority. The chairman of the liquidation committee in a special liquidation exercises the functions and powers of the legal representative of the FIE, while the committee exercises the functions and powers of the FIE s Board. Clearly, this arrangement significantly decreases the role that investors may play in such proceedings. REGIONAL PREFERENTIAL POLICIES Currently there are at least seven major types of special investment zones and areas in China: (1) Special Economic Zones, (2) Shanghai Pudong New Area, (3) Economic and Technological Development Zones, (4) Coastal Open Areas, (5) Export Processing Zones, (6) Free Trade Zones, and (7) High and New Technology Industry Development Zones. There are at least three compelling reasons for an FIE to consider establishing its operations in a special investment zone. First, during the establishment phase, many of these zones have created relatively sophisticated investment approval offices offering efficient and transparent establishment of operations, in addition to one stop shopping for governmental approvals. Second, these zones often take advantage of their experimental status and permit FIEs established therein to conduct a broader range of business activities than would be permitted elsewhere in China. Third, FIEs in these zones can often enjoy special tax holidays and concessions which are more favorable than those available in other regions of China. 9

10 As a general rule, income from the sale of goods is mainly subject to: (1) PRC Foreign Enterprise Income Tax ( FEIT ), and (2) PRC Value-Added Tax ( VAT ). Tax liability for the two PRC taxes depends primarily upon whether the income is sourced from within China and whether taxpayer has a permanent establishment in the PRC which is connected to such income. The applicability of different PRC tax rates, or tax exemptions, are dependent on how each type of income is classified, according to type and location of the enterprise, and how the relevant tax authorities interpret such classification. FIEs in China are subject to tax of 30% on their taxable China-sourced income, plus 3% for local income tax. Certain FIEs operating projects encouraged by the State, and located in some of these zones may be subject to a reduced rate of either 15% or 24% of FEIT. FEIT rate for manufacturing FIEs in China is 30%; but 15% in Special Economic Zones, Economic and Technological Development Zones, Export Processing Zones and Free Trade Zones and High and New Technology Industry Development Zones; 24% in Coastal Open Areas. FEIT rate for non-manufacturing FIEs in China is 30%; but 15% in Special Economic Zones; 30% in Economic and Technological Development Zones, Export Processing Zones and Free Trade Zones; High and New Technology Industry Development Zones and Coastal Open Areas. However, for technology concentrated projects and/or long term return projects in Economic and Technological Development Zones, Export Processing Zones and Free Trade Zones; High and New Technology Industry Development Zones and Coastal Open Areas, the FEIT rate will also be 15%; for exporting FIEs (exporting 70% or more of their output in a given year) in Economic and Technological Development Zones, Export Processing Zones and Free Trade Zones; High and New Technology Industry Development Zones, the FEIT rate will be 10% and 12% for the Coastal Open Areas. Other taxes (such as VAT and custom tax), including their respective tax holidays, are the same in all these areas. FURTHER INFORMATION For further information, readers are encouraged to contact their regular Jones Day attorney or any of the following: Barbara Mok in our Hong Kong Office (telephone: ; bmok@jonesday.com); Johnson Tan in our Beijing Office (telephone: ; jtan@jonesday. com); and Alex Zhang (telephone: ; zazhang@jonesday.com) and Winston Zhao (telephone: ; wzhao@jonesday.com) in our Shanghai Office. General messages may be sent using our web site feedback form, which can be found at www. jonesday.com. This is a publication of Jones Day and should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorneyclient relationship. 10

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